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A licensed club is only assessable on trading income which relates to non-members and on income received from sources outside its general trading activities. This is due to the principle of mutuality that recognises that any surplus arising from contributions to a common fund created and controlled by people for a common purpose is not income. ( Bohemians Club v Acting FCT (1918) 24 CLR 334; Sydney Water Board Employees Credit Union v FCT (1973) 73 ATC 4129; (1973) 4 ATR 157; (1968) 18 TBRD Case T55. )

Subsection 51(1) of the Income Tax Assessment Act provides that expenditure incurred for income producing purposes is allowable as a deduction, except to the extent to which it relates to gaining exempt income (or is of a capital, private or domestic nature). Accordingly, expenses incurred by a licensed club can be classified for income tax purposes as follows: (a) Non allowable: expenses relating specifically to members (e.g. members badges, members' functions); (b) Wholly allowable: expenses relating specifically to non-members (e.g. non member only promotions), expenses relating to wholly assessable income (e.g. investment expenses) and non-apportionable deductions including contributions to staff superannuation, rates and taxes and donations to approved funds ; and (c) Partly allowable: expenses which cannot be identified as either member or non-member. The allowable proportion is determined by applying the non-member ratio to the expenses incurred. The formula for providing clubs and their advisors with a basis for calculating the non-member ratio is as follows: ((B * 75%) + C) / (([R * S] * T) + A) Where A = total visitors for the year of income B = members' guests, that is those visitors who are accompanied to the club by a member and signed into the club by that member C = A - B R = the average number of subscribed members in the year of income S = the average daily percentage of member attendance at the club T = the number of trading days in the year of income

Clubs may, for the purposes of calculating taxable income, adopt an alternative measurement technique where there is a reasonable basis to do so (e.g. better recording system of member/non-member spending) and provided it reasonably and accurately reflects the club's income for the year in question.

A full discussion of these issues is contained in the Guidelines for registered and licensed clubs published by the Australian Taxation Office in May 1992.